Encouraged by a buoyant trend in home remittances in the recent past, the authorities are pondering whether or not some innovative ways to mobilise a still higher level of foreign exchange through this source could be discovered. As part of the scheme known as Pakistan Remittance Initiative (PRI), the State Bank of Pakistan on 19th October offered marketing expenses reimbursement to overseas entities that succeed to mobilise large amount of remittances for the country.
Under the scheme, overseas entities would be required to submit a detailed marketing plan to respective banks with which they have home remittance-related arrangements. According to the circular, the scheme will only be applicable to those entities who offer free remittance services under scheme of reimbursement of TT charges and the incentive would be given on country-wise performance of the overseas entities.
If an overseas entity or any of its affiliated concern is found involved in effecting remittances through channels other than banking sector, such an entity would not be entitled to reimbursement under the scheme. Initially, the scheme will be valid for one year and the government will reimburse marketing expenses through SBP.
It is not difficult to understand that the scheme to reimburse marketing expenses according to the amount of remittances mobilised in a particular period has been specifically designed to accelerate the pace of remittances which have been touching record levels during the first three months of FY10. The government of Pakistan is very keen to tap this source of foreign exchange earnings for obvious reasons.
The current account balance of the country continues to be in huge deficit and there is no other way to plug this deficit except through sustained efforts to generate more external resources which, of course, include the mobilisation of higher level of remittances. It is believed that one of the major impediments to the flow of remittances through formal channels was insufficient information about remitting the money back home and a lack of facilitation to overseas Pakistanis.
The SBP initiative will obviously prompt international money transfer companies with contacts with Pakistani banks to reach out to Pakistani community abroad more vigorously. Incidentally, banks already get a certain amount of rebate on every remittance transaction made for not charging fee from the recipient. Formerly, the banks used to share a part of that amount with money transfer companies; now the banks will keep the whole amount. Hopefully, this will motivate financial intermediaries to improve their performance and delivery services.
The primary aim of the initiative is to effectively counter the hundi-hawala system, which maintains an elaborate network of couriers for delivery or pick-up and from the remitter's place of work to the recipient's doorstep in the shortest possible time. The money transfer entities associated with SBP initiative will also have to develop similar networks, to be able to compete with the hundi-hawala system.
Actually, it all boils down to two things: one, the rate offered, and two, the duration of time in which the transfer is made and the remittance delivered to the recipient. As things stand today, the hundi-hawala network has a huge edge over the formal banking channels. The scheme devised by the State Bank aims at encouraging overseas entities to enhance their marketing efforts abroad and in all likelihood would increase the amount of remittances as a result.
However, it is very difficult to isolate the impact of the scheme on the overall level of remittances since it is determined by a host of factors including the income and number of expatriates working in foreign countries, conditions prevailing in Pakistan at a particular time, the difference between the exchange rate offered by banks, money changers and the informal channels and the comparative ease and speed with which the money could be sent to the country through these sources of remittances.
However, while such measures could increase home remittances to a certain extent, and contribute to the easing of pressure on country's current account, we would propose to the government to put more emphasis on a significant increase in exports with a view to achieving a kind of equilibrium in the balance of payments because of its vast backward linkages to investment, growth, employment and alleviation of poverty.
Such a route might be more difficult but is definitely more desirable. Also, the fact should not be forgotten that foreign remittances are profoundly dependent on some exogenous factors such as the level of economic activity in the foreign countries and their immigration policies. As such, to treat them as permanent or even a dependable source of financing the current account deficit on a long-term basis could be risky.
The pressure on inflow of home remittances arises from three sectors where financial settlement takes place under the hundi-hawala umbrella. First, it is the need for gold to cater for domestic demand for jewellery. Second is the demand from exporters involved in over-invoicing to earn higher rebate under the guise of R&D scheme.
And, the need of importers involved in under-invoicing of imports to save import duty and sales tax at the customs stage. And, lastly, the need of domestic constituents for a safe havens abroad as a fallback. The most sought-after destinations are: Canada, UK, UAE, Malaysia and now Sri Lanka. Home remittances could touch as high as $16 billion a year if the country has a more balanced tariff for trade transactions and a secure environment for its nationals.